Does Renting Make Sense?

Writing Your Money: The Missing Manual has been intense. I’ve spent a ton of time researching personal finance topics ranging from buying a car to funding a 401(k) to the relationship between money and happiness. My research has reinforced some of my convictions (index funds are the best investment for 99% of personal investors, for instance) but has toppled others. One of my beliefs that’s been set on its head is that Americans are better off buying their own homes. I don’t believe that’s necessarily the case anymore.

Advantages to renting
In 2007, Tim Ellis shared a guest post with GRS readers about the realities of home ownership. “It’s a real shame when people are driven to get into the housing market because of misplaced notions of imagined financial benefits,” Ellis wrote at the time. I didn’t pay much attention (because I was in London!), but I now believe he’s right. Yes, homeownership makes sense for some people. But there’s no shame in renting; in fact, for many folks, that’s the way to go.

The housing industry is huge, and it spends a lot of time propagating certain myths about homeownership, myths like:

If you rent, you’re throwing your money away.

Owning your home is a forced savings plan.

Home ownership is a path to wealth.

My own research shows that over the long term, housing prices (and gold prices) barely outpace inflation. In fact, since 1926, home prices (and gold prices) have returned about one percent above the inflation rate. That’s hardly a good investment. (Stocks have averaged about 6.8% above inflation!)

There’s no question that buying a house makes sense for some folks, but mainly for non-financial reasons. Owning a home gives you stability (you’re not at the mercy of a landlord) and freedom (you can do what you want with the place). But financially, it’s not usually the best bet. (It’s true that you build equity, but you do so at a very high cost.)

In an editorial in the June 2007 issue of Kiplinger’s Personal Finance, Knight Kiplinger wrote, “It often costs less to rent. The annual cost of owning a property, be it a house or a condo, is usually greater than the cost of renting, after taxes.” And there are other advantages to renting.

For one, you have flexibility; you can move at a moment’s notice. For another, you’re not responsible when things go wrong. If the shower starts leaking before you leave for your vacation in Duluth, you don’t have to worry about it — you call in the landlord.

Still, this is a personal finance blog, so let’s look at some ways to examine the decision to rent or buy in a financial light.

Renting by the numbers
One way to tell whether it’s better to rent or buy is by checking out the price-to-rent ratio (or P/R ratio). This number gives you a rough idea whether homes in your area are fairly priced. Figuring a P/R ratio isn’t too tough. All you need to do is:

Find two similar houses (or condos or apartments), one for sale and one for rent.

Divide the sale price of the one place by the annual rent for the other. The resulting number is the P/R ratio.

For example, say you find a $200,000 house for sale in a nice neighborhood. You find a similar house on the next block for rent for $1,000 per month (which works out to $12,000 per year). Dividing $200,000 by $12,000, you get a P/R ratio of 16.7.

But what does this number mean? Writing in The New York Times, David Leonhardt says, “A rent ratio above 20 means that the monthly costs of ownership will exceed the cost of renting.” That’s \a little opaque, but what Leonhardt means is that the higher the P/R ratio, the more it makes sense to rent — and the less it makes sense to buy.

During the housing bubble, the national P/R ratio came close to 20 (and went far above that in some cities). In other words, you could rent a $200,000 house for $10,000 a year (or just over $800 per month), which is a pretty good deal.

The normal range nationwide is between 10 and 14 (meaning it would cost between $1200 and $1600 to rent a $200,000 house). During the 1990s, just before the housing bubble, the national P/R ratio was usually between 14 and 15 (about $1100 to $1200 to rent a $200,000 house).

Another way to gauge the cost of housing is to compare it to your family’s income. From 1984 to 2000, median home prices were about 2.8 times the median yearly family income. (In other words, the typical house cost about three times what a family earned in a year.) During the early 1970s, home prices were about 2.3 times median family income. During the housing bubble, this ratio jumped to 4.2.

These numbers may not mean a whole lot on their own, but they can give you some sort of idea whether housing is overpriced in your area. Plus, it seems safe to assume based on past figures that most families can comfortably afford a home that costs about 2.5x their annual income. (So, if your family makes $80,000 a year, you can afford our theoretical $200,000 house.)

Note: I’ve shared it before, and I’ll share it again: The New York Times has a great rent vs. buy calculator that can help you decide which is best for you. Just plug in the numbers for your situation, and the calculator tells you how long it would take you to break even if you bought a house.

Home sweet home
Despite the results of my research, I’m not about to sell our house. The thing is, there’s more to this decision than just the numbers. As I always say, money is more about mind than it is about math. Our financial decisions have more to do with our psychology than with the numbers.

Kris and I are happy in our drafty old house. We love the vast yard that gives us space to grow a vegetable garden, blackberry canes, and fruit trees. We love the uneven floors, the outdated kitchen (everything’s from 1950!), and the zillions of windows. It may not make the most financial sense, but there’s more to happiness than just money.

We’re not about to move, but you know what? If I had it to do again, I’d never buy this house. If we had stayed where we were, we’d now have just four years left on our mortgage. But knowing what I know now, I might even be inclined to rent. For most folks, renting isn’t a bad option.

Note: This post contains bits and pieces that have been discarded (and some that haven’t!) from Your Money: The Missing Manual. My final manuscript was much, much too long, and we’re going to have to cut a lot of stuff. This makes me sad, but it’s not a complete loss. I’ll be able to share some of it here at GRS!

I’d like to again second the recommendation of the NYT buy-vs-rent calculator. Easily the best and most thorough one on the web. Punch in the numbers for your specific area to see if renting is still the better choice in your particular neck of the woods.

The problem with this is the assumption that renting is somehow cheaper.

over time it isn’t. Ever.

The decision needs to be based on timeframe. As others have said, it your situation is temporary, renting usually make sense.

But renting usually makes sense on all temporary things. A car on vacation. A moving truck. an airline ticket.

You rent all of these becaseu the use is temporary. If your living arrangements are temporary. Rent.

But if your living arrangements are a bit more permanent, or if you have kids in school, etc, then owning always wins. Just like owning is usually better with cars, clothes, furniture, appliances and anyhting else you use regularly and permanently.

That rental…someone OWNS it. All rentals are owned by someone. Why?

They all make money, or are supposed to anyway. That is the entire purpose or being a landlord. Your landlord isn’t losing money by renting to you. He owns it for $700, and rents it for $1000. He deducts the depreciation. He wins, not you. Not over time. 15 years from now he still owns it. It is likely now paid for. His expenses have gone way down. Your rent has gone way up. doubled. You still aren’t winning.

So, if your situation is more permanent, you are always better off owning than renting. The cost is fixed. IT does not increase with inflation. And at some point in time that cost ends.

Actually, the easist way to compare is to not assume there is a mortgage. Assume you have $200K cash. The house can be bought for $200K or rented for $1000 per month.

Your $200k invested at a fixed guaranteed rate of 5%, which is unlikely today only yields $10k per year, or $833 per month. Plus it is taxable income, so the net is likely $700-$750 per month.

Or you could pay cash for the home. No payment. No $1000 rent. You still have a $200k asset, but it grows TAX FREE. And you aren’t losing $250 per month by renting.

Over 30 years, that is a difference of hundreds of thousands of dollars. And if you still like renting, rent it out…to yourself.

There’s one part of this argument that always confuses me. Isn’t comparing a return on a home vs. return on a stock comparing apples vs. oranges?

If I buy a $300,000 house and it appreciates 1% each year, that’s 1% of $300,000, and then it compounds.

If I rent and sock away what I save by renting, say $500/month, put that in stocks, and got the 6.8% return you mention, that’s 6.8% on $500, which I add to each month.

I know there are enormous costs associated with borrowing the money for the house (some of which can be mitigated by paying the loan down early), but if you did a side-by-side comparison over 30 years with this scenario or others, what would be the net difference? How much money (equity) would I have in my home vs. how much money would I have in the bank (so I don’t have to worry about being homeless in retirement)?

I agree with everything in this article, except one thing. The statement that “Buying a house is forced savings” is not a myth. For far too many Americans, home equity is the ONLY wealth that people have at retirement (and not just people in million+ dollar homes). Alexandra #23 is right. Many of these people would not save the difference if they did not have a mortgage. The mortgage is forced saving.

The forced savings of home ownership is something generally agreed upon in the academic economics community, among both retirement and housing economists, so I’m not sure why anybody would think it is a myth. Yes, there are a lot better (more diversified) ways to save, but if you’re not going to save without it, it is better than just having Social Security or SSI at retirement.

I am 23, bought my house on a 30 year fixed a year ago. My house will be paid off before I am 40. So, if I stay where I am I will be living rent free for the last half of my life. If I decide to sell, I’ll be moving to a smaller home (we bought big, since the market is down). Our house has already appreciated 10%.

I don’t look at my house as a “forced savings plan.” Its a dwelling when I can live, not have to worry about my mortgage going up, and since the mortgage is only 20% of my net income (and thats paying extra on principal) and I can assume my income will raise at least 3% a year, this means my house will seem cheaper.

I think that renting or owning a house has to be considered with the current local market of rent price vs. own price, properties taxes and so on. We did all kinds of calculations and decided to buy rather than rent.

We bought our first house because with the same amount of monthly payment (around $2400~3000/month), we could:
- rent in a very small town house or probably just an apartment at downtown Silver Spring in a nice neighborhood, or
- pay a mortgage plus all extra fees such as property tax, insurances, security system, to own a house in a nice neighbor near Silver Spring (20 minutes driving).

The extra benefits that we have been receiving from owning the first house:

- good feelings: we have a house of our own. Don’t have to pay extra rent of $25/month just because we have a cat. My husband and I both enjoy working for our house like having a garden, building a shed here, planning on building a sunroom there, etc..

- we have tax deduction as we don’t have to pay tax on the amount that used to pay mortgage interest. I don’t think people can have tax deduction on the rent money.

- In the long run, we have what is called “house equity” – this is I believe the “throw away money while renting”.

All of the benefits that we have by owning the first house actually had helped us to save enough and bought a second house last year.

Now, if – yes, if – we worked and lived in not-crowded-area VA, we should rent instead of own a house as the rent is awfully low in suburb areas. One of our friends is paying for around $300/month renting for a big house, not a condo or an apartment – a real house in more than 1 acre lot. But that is just an if to us, we can’t deal with spending at least 3 hours in traffic every day (with no traffic jams) back and forth between suburb Fredericksburg and DC.

I have read above that some people complaining about fixing things around the house. Any house/condo always needs maintenance and once you live in it – rent or buy – you will have to pay in order to keep it working for you.

This is actually a good time to find a good house to buy, so buy a good house instead of buy a fixer-upper, and buy a house or at least a townhouse instead of an apartment or condo in big buildings. We bought our first house as-is because that was when the market was still up, it was cheaper to get a fixer-upper house at that moment. However last year when shopping for the second house, we found plenty of inexpensive nice ready-to-move houses. It actually was hard for us at first to realize that we could buy a house and do nothing except sitting back and enjoying it. Our mind were still set for “buy and fix would be cheaper” even though the market had been down for awhile.

PS: I said buy a house or a townhouse, not an apartment or condo in big buildings as I was so fed up with living in blocks. My neighbors cooked plenty of smelly foods, another neighbor couldn’t deal with the smell so she tipped toes to the hall at night and sprayed Freeze in the air – which didn’t help my nose, a young guy next door always played music loudly, I accidentally ruined my one-floor-below neighbor’s bedroom decoration because I had forgot to turn off water for the bathtub.. such and such.

Who vacations in Duluth? I use to live by there and it is not a town I would vacation in Hahha – just kidding Right now I rent and while I would love to own my own place because I have a job and love the city i live in..i really does not make sense. I love being able to call in the landlord when something goes wrong, though sometimes I wish I could paint and have a cat..oh the dilemas! I think we are all fortunate to have this dilema alone

#50 Troy– your argument is ALMOST what my students get in public finance, but you’re missing the last piece which gives it the exact opposite bottom line.

In general equilibrium, everybody with the capital to buy a house for renting has a choice to buy housing or put that money in the stock market.

If buying housing is more profitable, they will flood the housing market until it is no longer more profitable than the stock market. Once the rate of return from real estate is equal to the (risk and hassle adjusted) rate of return from the stock market, the market will be in equilibrium.

On average, buying rentals and putting money in the stock market will give you the same rate of return.

Of course, individual housing markets are in constant flux, so sometimes you’ll lose money and sometimes you’ll make it big. But there’s no one heuristic for whether you should rent or buy in all markets. JD’s article is then correct on mostly all points.

There is a general heuristic that if you’re staying put for 5 or more years, you’re likely to recoup your transaction costs and the market will likely be higher than when you bought, so it is likely that buying is better than renting in that scenario.

(Our house has been going up steadily at 2%/year…. not as good as the stock market, but we have the benefit that we don’t have to live near college students, for which we pay a premium.)

I will agree that renting is usually cheaper per month than buying. If you are going to move around or just don’t want to deal with home maintenance, then renting is totally for you.

My husband and I got sick of our rent being increased by 10% at the end of every lease, having crappy appliances all the time (like a dishwasher that couldn’t clean rinsed-off plates), hearing our neighbors music through our walls, and having to pay huge non-refundable pet deposits ($300-$500) for a well-trained, clean, quiet, middle-aged Dachshund mutt.

We were renting a 1050 square foot, 1 bedroom apartment in Houston, TX for $730 a month in 2006. Our 1750 square foot, 3 bedroom home was bought in 2007 and is about $990 a month for the mortgage, taxes, and homeowner’s insurance. We also spend about $850 a year on maintenance costs that we didn’t have in the apartment – $380 for annual lawn service, $320 for annual pest prevention, and about $150 on things that need to be fixed…it really is cheap if you do it yourself or know the right people. It also helps if you find a home that is in great shape to start with…ours was less than 5 years old and hasn’t had any major issues yet.

In short, we pay an extra $3970 a year for 700 extra square feet and none of the problems we had when renting. When we do move, our house will be worth something.

We got $0 after moving out of the apartments we paid about $18,000 to live in for 2 1/2 years.

By the time we pay off our house (no later than 2018…11.33 years total or less), we will have put in about $145,000 for the mortgage and interest, $27,500 for the taxes, $9000 for homeowners insurance, and $15,000-$20,000 in maintenance costs if we replace the A/C, the water heater, a couple of major appliances, and continue paying for lawn and pest services. That comes to no more than $201,500. If our house appreciates 2% a year for the next 11 years, that is about $160,000. That means we will have “wasted” about $41,500.

If we had rented for $730 a month for 11 years, that comes to $96,360.

By owning our home, we will have saved at least $54,000 in 11 years plus we will not have a mortgage payment again until we choose to move.

Yes, renting is cheaper short-term, but it really is money that you will never see again. Buying a home should never be seen as a money-making investment, but at least it gives you something tangible.

I would say that each person needs to take a close look at the numbers in their area to see whether owning a home is the best idea. My husband and I will never rent again.

JD, you jumped around it, but I would like to explicitly state, that there is a MENTALITY that has to go along with being a homeowner. When we bought our first house I had an awful time getting DH to understand that, when you own a house, deferred maintenance is eating away at the value of YOUR property. The costs ARE yours and if you don’t want to pay a plumber $300 you’d better understand what CAN and CANNOT be flushed (my old roommate flushed paper towels as she was cleaning, *shudder*), and why it is a bad idea to just toss bacon grease down the drain. One day I was packing a two week business trip and we were having a fight about getting things done and he asked me what I wanted him to do while I was gone and I told him, “Pretend that it’s YOURS!” It finally got through to him that part of his responsibility was knowing what needs to be done. The other part is doing it.

Some people don’t want to learn these skills and take that responsibility, which as you pointed out is a completely legitimate choice. But what drives me crazy is people who not only don’t take into account what it will cost to do your own maintenance, but don’t DO the maintenance. As we look at investment properties you can often tell the ones that people are getting out of because they shouldn’t have owned a home in the first place. Immaturity, laziness, ignorance, or just in over their heads. No matter the cause it’s very sad to see a place fall to crap and lose value because it’s not taken care of, or it’s patched together because someone is cheap or doesn’t know better.

I love that renting lets me afford to live in a neighborhood where I could not afford to buy.

It is amazing how brain-washed Americans are about home ownership, to the point that it seems many don’t even consider renting. They buy a home even when they might only be in a city for a year or two. And we seem to have internalize a notion that profiting on a home is a fundamental human right. I wish more people realized that homes are investments, and investments can make or lose money. I wish more people would also realize that they definitely should not buy if they won’t be in the home for 5-10 years, preferably even longer.

This article confirms one of the main reasons my wife and I continue to rent. Although we’ve only been married a few years, family, friends, work colleagues, and society in general has been pressuring us to buy a house simply because that’s the thing to do.

Every year we do the math and the numbers always tell us now is not the right time. We’d rather put the money we’re saving on rent and potential home ownership costs toward funding our IRAs, paying down graduate school debt, and having a baby. Plus, we are planning on relocating for work over the next couple of years and we want the freedom to pack up and leave whenever the opportunity presents itself.

J.D., thanks for reminding your readers that sometimes going against conventional wisdom makes better sense than following the crowd.

“I went to the Home Depot the other day, which was unnecessary… I need to go to the Apartment Depot, which is just a big warehouse with people standing around saying ‘hey, we ain’t gotta fix [crap]!’” – Mitch Hedberg

As has been said on this site numerous times, buying a house will be the largest purchase most people ever make. Therefore, it’s very important to get it right — and like most important decisions, it’s not an easy one to make. I think the point JD was trying to make is that a TON of factors go into whether it’s right for you. I rent, mostly because I’ve been actively looking to find another job, which would almost certainly require me to move — so owning isn’t an option. Sure, I could have been building equity for a few years now, but then what if I move and can’t sell the home? What are the costs of having to rent elsewhere while paying this mortgage, what if I rent the home and it gets trashed, or what if the numbers just don’t work out enough that I could take a job in another area. Surely all of those costs would eat away at the equity if not put me at an overall loss.

Additionally, there’s the risk of buying at the wrong time — as anyone who bought maybe 5 years ago knows. But, as mentioned above, what if inflation gets out of control and the cost of renting doubles in 2 years?

Beyond the savings/equity argument, there are plenty of other financial issues as well. Older houses are cheaper, but they often require a lot of work. Hiring help is expensive, and certainly less efficient than the share you pay for the full-time maintenance person on staff at many apartments. I’m pretty handy, so if I need to replace or fix something, it’s not too expensive. But many people aren’t, and every time you need something fixed, it’s $100/hr to have it done. And then there’s mowing, snow-removal, etc… that either takes time or money, or both.

And the psychological factor is huge. I grew up in a house where our yard was about 1/4 of a city block. I now share a “common area” with 100 others. Not being able to watch a loud movie a midnight in an apartment is a big negative. So are neighbors sharing a wall. But what’s a trash shoot worth to avoid taking out the garbage in the winter? All of these things have a dollar value and should go into the overall decision.

Long story short, it’s very hard to know if buying a house is the best decision for anyone other than yourself.

The real estate website HotPads.com has a good buy-vs-rent calculator as well -http://hotpads.com/mortgageCalculator.htm – and it allows you to search for homes based on monthly payment, both rentals and for-sale to compare.

Sometimes you can come up with a P/R ratio on the exact place you are living in. At least in my case, I know my monthly rent and I can look up the estimated price of the house on zillow. According to that I have a P/R ratio of about 16.

As I mentioned, I (and my wife and upcoming baby) are renting right now. The numbers are getting a little more reasonable for buying than they used to be in my area a couple years ago. But as everyone says, it’s not just about the math (as much as I truly do love math.) In fact I think the biggest impediment to us buying may be my emotions – my reluctance to commit to living on this side of the country, and give up hope of moving back to the East coast where both my family and my wife’s family live. As long as we continue to rent, we’re only locked in to living away from our families for one more year.

Please don’t forget the cash impact of tax deductible expenses. If you already itemize, or your mortgage pushes you over the top, it can change the calculation. This is especially true in parts of the country with high property taxes. If you can change houses and at least break even on each sale, you are still money ahead. Although its possible to find a landlord that doesn’t cover their expenses with rent, it would seem to be unlikely.

Buying a house is only forced savings if you are not allowed to keep refinancing and cashing out any increase in equity or taking out huge lines of credit like enormous numbers of people were doing before the crash.

@Shara (62) – excellent point. I am STILL acquiring this mentality.

@KF (63) – good point about the brainwashing, too. We are also brainwashed to go to college if at all possible, get a good job, get married (to someone of the opposite gender), and have kids. Who knows what other brainwashing I have that I don’t realize. Sometimes it’s really hard to see what your options really are and what they could be like.

We “own” a home. Mortgage is $875/month, insurance $62.00/ month, property taxes $308/month, water & sewage $32.00/month. This year we paid $85.00 to repair our stove, $350.00 for a leaky water line, and $450.00 for a new hot water tank. I have no idea what we spent on miscellaneous home and yard maintenance (sorry JD) but let’s say a conservative $500.00. That comes to a total of $16,709 for the year. We’ll assume that there will be repairs and maintenance every year, some higher, some lower (last year we needed a new roof at the tune of $7200.00). So let’s say owning a home averages us $17,000.00 per year. Or $340,000.00 for 20 years. My home will not be worth $340,000.00 or more in 20 years. I would say it would be more like $200,000 to $225,000. I will lose a lot of money.

If I rent a house for $1,000.00 per month, the maintenance, insurance and property taxes, etc are someone else’s problem. I spend $12,000.00 per year, or $240,000.00 over twenty years. Even if my rent increases, which it probably will, I figure I am still ahead.

@71 Debbie: “Buying a house is only forced savings if you are not allowed to keep refinancing and cashing out any increase in equity or taking out huge lines of credit like enormous numbers of people were doing before the crash”

That is true. Fortunately it is only a recent phenomenon and banks have become more cautious. Also, some states (like TX), only allow you to take out a certain percent of home equity as a loan.

We moved about every 3 yrs when I was a kid. Nevertheless, my parents only rented when we were overseas. They took a hard hit on one house – dad’s office closed after only 1 yr – but they must have done ok overall because dad is in fine shape today and has helped 2 of us buy our own homes so far. Of course he was lucky too; the previous house he was in for 9+ yrs, sold at the top of the boom, went overseas for a few years, and was just able to buy an awesome house in a depressed area. Talk about buy low sell high! whew!

For ourselves, we bought for several reasons. Rents were comparable to the mortgage we got, and our house is better than anyplace we saw while renting. We also haven’t had the best luck getting landlords to actually DO anything. In addition we have two big dogs, always a drawback when trying to find a place to rent. Finally, we were really ready to settle down and STAY someplace; one of my goals in life is to live in one place for 5 yrs. (haven’t done it yet but we only need about 9 more months!!!)
It’s not perfect. There are some drawbacks. But I don’t think we could do better with a rental, money-wise or any other way I can think of.

Thanks for the great discussion. There are tons of situations where renting is better; we just aren’t in one of them right now.

TeresaA, did you consider that in 30 years you will have spent 120,000 more in mortgage (if your rent doesn’t go up, which it will) while you will have a 200,00+ house paid off? That seems like an advantage of 80,000k to me (before adding rent hikes).

Re: myths, perhaps people would be less defensive if we called them “dogmas.” The three statements J.D. highlighted are opinions, not facts, and are easily countered OR supported, based on your personal values and assumptions. For example:

“Renting is throwing money away:” No, it is exchanging money for a place to live, and sometimes can represent significant savings over buying. DH and I currently exchange $2400/mo in rent for a place to live that would cost us over $4000/mo to buy (identical floor-plan across the street) – plus maintenance, plus HOA fees, plus property taxes/insurance, so really closer to $5000/mo – PLUS we would be committed for 30 years to never move, or have to gamble on getting our money out when we do move.

“Owning your home is a forced savings plan:” Not unless you sell your home for as much as or more than you’ve paid, INCLUDING improvements, interest, etc. What it IS, is an excellent way to lock down your fixed living expenses … and as such, is probably the best choice for MOST people if they are able to PAY OFF the home prior to retirement.

“Home ownership is a path to wealth:” Not unless the home itself gains in value at the same time that owning the home permits you to accumulate cash, and even then only if your primary definition of “wealth” is money. I’m sure Chris Guillebeau feels pretty wealthy without owning a home.

DH and I want to own a home for retirement. Ideally this will be a fairly small, low-maintenance house, with a little bit of land, in a mild climate, so that we can have the lowest possible fixed expenses and be as self-sufficient as possible in energy and food production. Those are practical reasons for buying a house … and I really think people would benefit if they looked ONLY at the practical and took all the emotion out of what is typically the biggest financial commitment of a lifetime.

Here in CA, the real estate market continues to slide. For those of us who DIDN’T buy when everyone was telling us to, a big opportunity is opening up. We will be able to find a property we want, in the area we want, at the price we want, because so many others saw housing as a get-rich-quick scheme instead of what it is: a place to live.

Sure, the idea of using the P/R ratio to determine if it’s better to rent or buy makes sense, but only at the time you do the comparison. The rental price will rise year after year, while your mortgage payment will only rise by the amount of property tax increases. My parents, for example, now only pay roughly $3000/year for a $100,000 home because they have paid their mortgage in full. They could never rent for that amount.

I have recently seen many articles like this that show that renting is financially as good as buying. After crunching all the numbers, every article has left out a huge, glaring fact: With buying, you have the potential to save or use the equity you have saved up…roll this over into your next home and work toward a no-mortgage existence. How huge is that? There is a risk of buying and loosing money on repairs and taxes and such. However, with renting, you loose every penny of your rent every time…no exceptions…100% reliable loss. These articles I have been seeing like this should say, “Renting is convenient if you don’t mind loosing your rent every time.” I’ve been a student for the past six years which has required regular relocations. I would have loved to have purchased instead of having to rent. With repairs, taxes and even the economic downturn causing lower house prices, there is no way I could have ever lost $72,000 (my rent bill for this time period). If I purchased a new furnace ($5,000), roof ($12,000), Refrigerator??? ($900) and lost $20,000 on the sale because of the economy…I’m still coming out over $35,000 ahead. Please correct me if I’m wrong…I’m trying to understand what people are trying to say about the equality of renting to buying but I just can’t see it.

Some of the folks that are advocating buying over renting because of the flat mortgage amount vs ever increasing rent are missing the point. The national average is that people move every seven years or less. Unless you are someone who is definitely, definitely, definitely going to stay somewhere forever, renting is a better “financial” decision than buying. It always has been, always will be.

While the mortgage may be flat, all of your other home ownership costs are going up. Taxes go up, insurance goes up, the cost of roof repairs go up, etc., etc., etc. That’s exactly the same reason rent goes up, the landlord’s mortgage is consistent (usually) as well but he has to raise the rent as his operating costs increase. Trust me, as a landlord with up to 25 properties at a time I know this painfully well.

If you can’t guarantee you’re never going to move then rent, save the difference between your rent and a mortgage and then buy a house free and clear when you decide to buy your “final” home (or at least one you’ll be in for 10yrs) and pay cash for it.

As for us, I’ve owned many houses for profit, homes for living and investment properties (condo’s, apartment complexes, etc.). We’ve done the analysis repeatedly and even in the strong RE market we experienced in the recently we lost money on each home (not investment props) in the long haul. If you truly track all your costs, your purchasing cost, your net interest costs (after tax benefit), your operating costs, your maintenance costs, your repair costs, your replacement costs, etc., etc., you’ll see every time that financially you lose.

I think the real issue is that renting has developed the societal stigma that is unjustified. As a result subconsciously people have an opposition to renting they cannot even articulate. It gets translated into verbiage like “security”, “my own place”, go ahead are reread some of the ownership posts above and you’ll consistently see these and other phrases that we’ve internalized and didn’t even realize.

I’ve come to learn (after many years) that I can make a beautiful home anywhere, regardless of whether I own it or not. It’s ALL about your attitude, not whether you own it or not. There are plenty of owners that can tell you nightmare’s of disastrous repairs that ruined them financially, horrific neighbors that they trapped next too, reversals in the neighborhood that dropped values, etc., etc.,and now economic disasters that led to owners being upside down on their mortgages!

While it is about what’s right for you maybe it would be good to very openly and honestly evaluate why you feel the way you do. Are you just tired of the throwing your money away comments, did your parents drill home ownership into you as a marker of success, etc.?? Take a step back and look at it with a very open mind, get an objective friend to help you question your premises for ownership.

It looks like a lot of people still make a cardinal mistake when calculating renting vs. buying. It’s just not enough to compare your monthly mortgage payments to monthly rent payments. And also, “Viola! After xx years there will be no more payments because the home will be paid off!” That’s one of the realtor myths JD mentions in the article.
Your equity is tied up in the home, and as JD points out, stocks historically outperformed real estate by over 5% annually. Those opportunity costs need to be factored in.
And yes, buying a home is a leveraged investment, but I find it strange that in these days people still regard that as a good thing. I know it’s crazy, but it can go either way. Yes, houses can lose value, and yes, you might be forced to sell during a downturn, and then this leverage can bankrupt you.

But there will still be property taxes, insurance, repairs and maintenance even after the house is paid off. At my current figures, home ownership will still cost me $9,020.00 per year. And all of those things are likely to increase as well.

I rented in the past, and I am proud to say that I was the best renter who ever walked the earth because I paid early AND left the place BETTER than I found it. We never wore shoes in the house, and we treated it with love and respect.

Thank you so much for this post! I feel like I don’t really have a choice as I can’t afford a two bedroom apartment and don’t want to get stuck in a 1 bedroom and have to worry about outgrowing it. It’s nice to get some validation from someone I admire that I’m not a financial mess because I rent.

Most apartment complexes allow you to break your lease by paying a month’s rent.

And buying a house to have a place to live in when you retire? That doesn’t make too much sense to me. Life circumstances tend to change. A five bedroom mansion makes sense if you have a family, but as a retired couple or even alone, that’s way too much house. My idea of retirement is having an RV and roaming the country, or hopping from country to country, staying half a year in each city until it gets boring, all paid for by an investment portfolio that pays regular dividends. I don’t know if that’s a sign of poor education?

I still don’t see much of a “savings”, if any. And what if I were to save and invest the difference between the money I do pour into home ownership for the twenty years of the mortgage ($700.00 per month) if I rented instead? That would be a pretty tidy retirement fund, plus I could then buy a house for cash. How much do you have to save and invest per month for twenty years to be a millionaire?

I think we have been sold another “bill of goods” when it comes to home ownership.

This is the kind of article I should show to my sister, who feels she is losing out because she is not in a house. However she, and I myself know, than many of the benefits of home ownership are nontangible. I really liked the house I was renting, but I couldn’t paint the walls and didn’t want to buy window treatments for a rental, our garden would get mowed down by the maintenence people, and the neighbors would throw stuff in our yard because there was no fence between the two properties. Plus, my husband enjoys DIY projects but couldn’t do anything while we were renting. The rent to own ratio is not as important as a) knowing and fulfilling the reasons why you want to have a house, and b) whether you can afford it.

For the next 10 years, for most people renting will be the better financial decision than owning a house.

I have written extensively on this topic for years and it is sad that it took a financial meltdown for people to run the numbers and realize that you only make money owning a home as long as prices are rising. Those days are over.

$125,000 over 20 years doesn’t sound like much savings to you? Sounds like a boatload to me.

Not to mention you then live rent-free for the rest of your life. If you’re 40 now and you pay your mortgage off in 20 years you’ll be 60. If you live to be 85 (and if we assume you rent for the same $1,000 a month) there’s another $300,000 saved. In all likelihood, rent will be significantly higher 40 years from now, so that figure is grossly understated.

I guess I would say if you don’t feel the itch to buy and are happy renting, then all means don’t let someone try to convince you to buy for financial reasons. But I think a lot of people are like me and are tired of living in someone else’s home. Yes, there are perks to this, but ultimately if you are picky at all about your household and like things a certain way, it can be difficult to rent. I can’t tell you how many bad sinks, faucets, wet basements, weedy front lawns, etc. I had to deal with over my many years of renting. The reality is that unless you rent in a new complex or pay more for an expensive rental, you are living with cheap fixtures and materials. This doesn’t even go into the issue of neighbors who share a wall with you. For us, it was worth the extra expense to buy our own home because it dramatically improved our quality of life and enjoyment of our surroundings on a daily basis. Isn’t that ultimately money worth spending?

My P/R is 36.5! That’s $1200 rent and $525,000 equivalent purchase (is my math correct?) San Luis Obispo, along with the rest of the central coast of California, is completely insane.

We’d really like to own a house, for many reasons, but it’s just not going to happen unless the market fundamentally changes. It’s not worth burdening ourselves with crushing debt… sales are close to a standstill, so maybe I’m not the only one coming to the same conclusion?

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